Human nature means that we all want to get a good deal when we buy something. This can be negotiating over buying a car or a house, or even snapping up sale bargains. This carries over into investing in the stock market. For many, buying a UK stock when it’s at all-time highs isn’t as appealing as buying a cheap UK stock. Buying when the share price is heavily in the red can make you feel that you’ve got a good deal.
This view can be correct and work out well long term, but investors need to be very careful. Sometimes the stock is cheap for a reason as the business is struggling, rather than falling (perhaps unfairly) along with its peers during a market crash. Over the past 12 months, several FTSE 100 stocks are down over 50%. So are they cheap buys, or are their low prices a warning sign?
Aviation
Two stocks that fall into this category are linked to the airline sector. These are Rolls-Royce and International Consolidated Airlines Group (IAG). Rolls-Royce supplies engines and works on service and maintenance. IAG owns British Airways and Aer Lingus, along with other brands. Between the two firms, the share prices are down between 70% and 84%. This is in large part due to the pandemic, with associated lockdowns and a reluctance by many to travel.
Does the slump make these UK stocks cheap? This is a really tough one to answer at the moment. Rolls-Royce is struggling to operate, made evident by the news late last week about a new rights issue and bond issue, aiming to raise £5bn. IAG is also looking to raise fresh capital. In my opinion, this sector is too risky to invest in at the moment. A small speculative investment could be warranted, but I wouldn’t invest more than you’re happy to lose.
Oil
The other major industry that has massively underperformed over the past year is oil. Shares in BP are down 56%, with Royal Dutch Shell down 59%. Both firms have suffered indirectly from the pandemic. For example, demand for jet fuel has fallen off a cliff, which impacts revenues. Demand for petrol and diesel also slumped during Q2, although this has almost returned to normal. Pressure on the oil price has also eaten into margins. This makes the two stocks look cheap.
I’m more optimistic on the two oil majors recovering in the long term. The firms are part of a small club that dominates the industry, so demand will always be shared out between them. Demand for refined products should continue to head back towards normal, as governments cannot afford to have prolonged national lockdowns as earlier this year. Further, if dividends are reinstated back to the level seen before the pandemic, this should attract a wave of income investors. So I think these shares do look cheap but potentially valuable too.
Cheap UK stocks worth buying
One of the signs of a good investor is deciding when not to buy a stock. Fear of missing out is simply not a valid investing strategy. So do your homework and see whether a stock is a cheap buy, or something to steer clear of!
